Ethiopia’s beer market promises to be of a different mould

The last of Ethiopia’s government owned brewery ‘meta’, (which was also the crown jewel) was sold to ‘Diageo’, a company that is big in booze. Besides its varied businesses, spirits, etc, it also owns ‘Guinness’, an entity that is big in beer. Its presence in Africa, particularly in this part (East African Community) is quite formidable. The Kenyan beer market is fully monopolized by its operating arm- ‘East African Breweries’, bottler of brands like, ‘Tusker’, ‘White Cap’, etc. Like many African states, the Ethiopian state has now exited the lucrative beer business. Africa’s beer market is one of the fastest, if not the fastest growing in the world. If the beer market is blessed with profitability and growth, how come it was targeted for privatization?

Two reasons feature prominently. The first is the dictat of the IMF/World Bank/WTO, etc. Once you are under the grip of these institutions, there isn’t much room to wiggle. Even Greece is now asked to sell its most lucrative enterprises (airports, seaports, etc) as well as surrender its priceless assets, (such as the ‘pantheon’ and its islands in the Aegean Sea) as collateral to its merciless creditors. What debt can do to you! The other reason is: even though beer is big business, it is not as strategic as, say banking or even telephone. Don’t forget, at the end of the day, governments make more money on beer than the brewers themselves. Here is how it goes; the beverage business is subject to severe excise tax, a ‘sin tax’, as it is customarily called and is levied on the ‘production cost’ of a particular product.

Suppose for example, the production cost of product A is one birr and the prevailing excise rate is 100% (It used to be 150% in Ethiopia). Then for every bottle of product A, the government takes one birr as tax from the selling price (which will be upwards of two birr). Now suppose the production cost of product B is two birr; this means the government will take two birr from its selling price. In this scenario, brand B will have a hard time securing enough volume to sustain itself, (quality being the same as product A) as its final price of four birr plus becomes dear, relative to product A. Because of this clever tax scheme of the states, producers have a built-in incentive to lower their production costs. Lower production costs mean more volumes and more volumes mean more tax revenues for governments, resulting in a more or less ‘win-win’ situation, to use a clich?. Moreover, the effect of wide spread ‘sud culture’ on the ‘beast’ (mass) should not also be underestimated. By soothing and at times by potently tranquilizing the restive elements of the ‘herd’, sud had been helping to secure the peace throughout the ages (for the benefit of the governing class). In times of need, governments can easily jack up the ‘sin tax’ to collect millions more without sweat. This is why; even though beer is big and profitable, the states didn’t mind privatizing it!

The process of privatizing Ethiopia’s breweries has taken over a decade and this might seem a bit too long, but as we elaborated above these serious cash cows need not be to be dumped just like the other wasteful state enterprises. We believe the wait has probably paid off. For a start, the government has collected about half a billion dollars for its old beverage factories, while assuring the partaking of all the major players in the beer industry (SAB-Miller, Guinness, Heineken, BGI.) The Ethiopian government has also managed (at least so far) to cutout ‘financial investors’ from direct participation in its beer industry. By and large, financial investors are neither knowledgeable nor kosher when it comes to productive activities. Just because some characters have managed to hit the ‘jack pot’ (embezzling, laundering, drug money, etc) it doesn’t mean they should be entitled to owning/operating such coveted enterprises. At least in this particular privatization project, (unlike its many other mistakes/failures) the government’s strategy was right on the money! What are the likely scenarios of post-privatization? Assuming all the parties (the four majors and local brewers, current/upcoming) will be directly engaged in the business of brewing, the Ethiopian beer market promises to become (probably) the most competitive in Africa, with attendant benefits.

This on its own (besides other things) can assure product diversification and competitive prices. However, experience dictates that this is easily wished than done. At the outset we have to recognize that multinationals are multitalented and can come up with all sorts of arrangements that can baffle the state’s mundane authorities. For example, SAB-Miller has a full monopoly in South Africa and all attempts by outsiders have landed them heavy blows. Those adventuring souls who braved its market expired by hemorrhaging serious money. The carcass of brand new breweries litters the place. Therefore, for a big brewer consolidation (cornering the market by itself or with friendly competitors) is a very important objective.

It would cooperate with others only if it feels slugging it out is not a viable option. For example, SAB-Miller bottles ‘Amstel’ for Heineken in South Africa and Guinness bottles SAB-Miller’s brands in Kenya. SAB-Miller tried to slug it out with Guinness in Kenya, but soon abandoned the ambition, as it proved too costly (spent close to USD 70 million before it closed its factory.) BGI and SAB-Miller used to have a ‘non-competition’ agreement throughout Africa (BGI has a full monopoly in French speaking Africa.) SAB-Miller’s long standing desire to gobble up BGI has always been a public secret and in fact one wonders why the acquisition deal, (which was worth over USD 10 billion) is still not consummated. The beverage market is highly correlated to per capita rise in GDP (not counting other factors as religion, etc.) That is why Nigeria is 2nd in Africa (South Africa is no 1.) For now, Heineken has garnered about 70% of the Nigerian beer market, but the battle is still raging on. The moral of the story is; governments must be vigilant in monitoring the activities of these multinationals once they enter their markets and decide to play hardball. In this regard, Ethiopia’s anti-competition policy (an operator cannot have over 30% of market share) can help.

The beverage business is not about production, the assumption of novices notwithstanding. The beverage business is first and foremost about retailing, marketing/branding (hence requires deep pocket). That is why the giants are willing to pay premium prices for old factories. They know the trick is to hit the market running, otherwise with what ‘Diageo’ paid for ‘meta’, it could have easily put up three equivalent breweries. Our final unsolicited free advice goes to the developmental states; governments in Africa must be very cautious/prudent about the merit of rushing their privatization process. The virtue of selling the families (Mother Africa’s) jewels for mere pulp (paper/fictitious currencies, founded on a financial system that disfavors the poor (Africa, et al) and is based on phony money-credit) must be interrogated severely, particularly as we enter the crisis phase of the prevailing world order. Why sale a ‘gold mine’ or the ‘palace ground’ for an ephemeral entity (paper money) that can easily be blown off in the next economic tsunami? See Fry’s article on page 50. Beware; as the old Ethiopian proverb advises; “Commotion is conducive for thieves.” Good Day!